BNZ’s ongoing investment and momentum delivers sound results

Strong underlying momentum has seen Bank of
New Zealand (BNZ) report a statutory net profit for its
banking group[1] of NZ$416 million and a significant
increase in cash earnings3 of 9% on the 2016 prior
comparable period.

“This achievement reflects the
progress the business is making in delivering its strategic
agenda, in a challenging and competitive market. In our
priority customer segments, we have seen a further lift in
customer advocacy which is particularly pleasing. This is a
result of our focus on the end-to-end customer experience,
particularly in our digital offering, which allows us to
deliver our customer promises and to help New Zealanders be
good with money.

“The current strength of the New
Zealand economy is delivering benefits and challenges, which
is reflected in very sound credit quality and lower bad and
doubtful debts, but with increasing margin compression as
credit growth continues to exceed deposit growth in the
system,” said BNZ CEO Anthony Healy.

BNZ Banking Group1·
Statutory net profit1 of NZ$416 million, NZ$35 million less
than last year, due to mark to market movements on offshore
debt instruments, partially offset by higher cash
earnings.· Cash earnings3 of $484 million,
increased by NZ$40 million or 9.0%· Common
Equity Tier 1, Tier 1 and total capital ratios1 of 10.55%,
12.06% and 13.29%.

NAB NZ Banking Reporting
Segment[2]· Underlying profit2 increased by
NZ$23 million or 3.6% mainly due to higher net interest
income.· Cash earnings[3] increase of NZ$43
million or 10.4% to $455 million was driven by higher net
interest income and lower charges for bad and doubtful
debts.· Net interest income2 increased by NZ$25
million or 3.1%, driven by growth in lending and deposit
volumes, partly offset by lower net interest margin.·
Net interest margin2 decreased by 12 basis points to 2.15%
driven higher funding costs and lower earnings on capital.
This was partly offset by improved lending margin in both
housing and business lending.· Other operating
income2 increased by NZ$1 million or 0.4% mainly due to
improved fees and commissions partially offset by lower
markets sales income. · Operating expenses2
increased by NZ$3 million or 0.7% mainly due to the
investment in Auckland and broker channels in 2016 resulting
in higher depreciation and amortisation expense, offset by
operating efficiencies.· Charges for bad and
doubtful debts2 decreased by NZ$44 million or 52.4% as a
result of improved economic conditions, including the
outlook for the dairy portfolio.· Customer
deposits2 increased by NZ$4.2 billion or 8.6% as a result of
the focus on deposit growth.· Gross loans and
acceptances2 increased by NZ$5.1 billion or 7.2% driven by
housing and business lending.

Commentary – Anthony
Healy

Digital investment“BNZ continues to invest
in digital and online banking and payments technology to
meet customer demand. Since FY14 we have seen a 25% increase
in the number of people working in our digital teams. 89% of
transactions are now either through internet banking or our
app – that is up to 14m sessions each month. This is a 25%
increase overall and mobile is up 34%.

“Highlights
for this half include the New Zealand launch of BNZ Android
Pay in December 2016 on our BNZ Flexi Debit Visa card.
Within a week we had reached our 60-day target for customer
sign ups. Transactions and sign ups show that our customers
are open to new ways of paying. In April, we integrated
Android Pay into the BNZ app which is an Asia-Pacific first.
This means Android Pay can be set up and used with the BNZ
app, (as opposed to having to download a separate Android
app) making it easier for our customers to use.

“Our digital investment is helping our customers reach
their financial goals. Our home loan repayment calculator
allows them to increase their home loan payments from the
comfort of their couch. So far, customers who have made
increases to their payments stand to save $187m and take
43,000 years off their home loans. On average, customers
using this tool to increase their payments have taken two
years and three months off their home loan.”

Re-shaping our channels

“Our customers' needs and
preferences are changing rapidly - they expect simple,
intuitive experiences, fast turnarounds, simple processes
and technology that is "always on". We need to evolve with
our customers to remain relevant, and it is this imperative
that is driving our investment in digital platforms, our
focus on end-to-end customer experiences, and our ongoing
re-shaping of our physical and digital footprint.

With
almost nine out of ten transactions with our customers now
happening online, this means changes in our store network.
Sometimes this means reducing hours, sometimes this means
closing stores, and sometimes this means opening stores in
new areas. This reshaping of our network will continue into
the future, informed by our customers' needs and
preferences.

And as we simplify and deliver better
customer experiences that are faster and more efficient, we
are automating and digitising things that are currently
manual and don't need to be. Both these initiatives will
mean fewer people in parts of our business as well as growth
of investment in areas of our business that didn’t exist
10 years ago or indeed, even today. Where possible we look
to redeploy our people affected by these changes into other
parts of our business where we are hiring.”

Business Banking

“Our BNZ Partners offering
continues to resonate strongly in the market with SMEs. We
opened a new Partners Centre in the Christchurch CBD in
December 2016, and in March opened a co-working space in our
new Christchurch retail store, for small businesses, called
community 101.

Our business banking model is a real
differentiator for us in the market and our support of
regional New Zealand can be seen through the reach of our 34
Partners Centres across the country.”

Mortgage
market“We have had a real focus on sustainable growth
and the broker market is key for us achieving that, with
growth of $900 million in broker home loans this year. We
have a strong portfolio of six broker partners, who in turn
have more than 800 advisors. We’ve made improvements to
our processes and we’re realising the productivity
benefits of this.

“Housing affordability continues
to be an issue, though most recently we have seen the impact
of the loan-to-value restrictions in the housing market and
prices, particularly in Auckland, have seemed to plateau. We
anticipate there will be increased pressure on lending
margins in the coming months which will influence interest
rates. Essentially, while funding costs have fallen they
haven’t fallen by as much as our lending rates, which
means our margins have reduced. Today there are more people
looking to borrow, so banks are paying more to win customers
deposits so this will lead to higher lending costs being
passed through to borrowers.”

Contribution to a
high-achieving New Zealand“The expansion of the
Community Finance Initiative is a real highlight. Government
has committed an additional $4.2million in operating
expenditure and we have worked with Good Shepherd and our
community providers to expand this service in new areas
including Whangarei, Hamilton, Tauranga, Hawkes Bay,
Palmerston North, Rotorua, Wellington, Christchurch and
Invercargill. Community Finance offers low and no interest
loans to New Zealanders who typically don’t meet bank
criteria. We estimate that our $1,046,248 of lending has
saved customers more than $560,000 compared with borrowing
through alternative lenders. BNZ has committed a total of
$60 million of lending to support growth of the community
finance initiative and has a dedicated team to support the
initiative.”

Additionally, in March, BNZ’s new
responsible investment strategy took effect and we now
exclude international equity investment in companies
manufacturing cluster bombs, nuclear armaments, land mines
and tobacco. We listened to the views expressed in the
responsible investment debate last year and have aligned BNZ
with our customers’ opinions.

Capital and Funding
PositionBNZ maintains a robust capital structure, with a
strong balance sheet that is well funded through diversified
and stable funding sources. BNZ’s Core Funding Ratio (CFR)
of 85.59% exceeds the Reserve Bank of New Zealand (RBNZ)
minimum requirement of 75% as at 31 March 2017. BNZ’s
Common Equity Tier 1, Tier 1 and Total capital ratios of
10.55%, 12.06% and 13.29% respectively, as at 31 March 2017,
were well above the RBNZ minimum capital ratio requirements
of 7.00%, 8.50% and 10.50% respectively.

Bank of New Zealand (BNZ) has been a big part of New Zealand life for over 150 years since its foundation in 1861. The bank employs over 5,000 people and has more than 170 retail stores and 32 Partners business centres across the country.

Passionate about enabling a higher achieving New Zealand, BNZ works with personal, business, agri, and private wealth clients, helping them grow and make their goals a reality.

A subsidiary of the National Australia Bank Group of companies, BNZ is governed locally by a Board of Directors and strives to help New Zealanders be good with money.

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